Sell In May

An old Wall Street dictate is "Sell In May & Go Away". Actually most years it has paid to sell in the March-April time period. A seasonal period of spring weakness is a well documented part of the yearly market cycle and if anything has become more pronounced in recent years.

I bring this up today because all of a sudden the world seems to be discovering that the market has had a pretty good August (albeit on lower than normal volume). However a simple glance at most charts show that stocks have rallied from their summer lows and have basically made it all the way back to where they traded in early May.

Above is a chart of the proxy I use for the S&P 500 (the SPY ETF). From it's May highs to it's mid-June lows the S&P 500 fell close to 8%. It has spent most of the past 6 weeks in rally mode and is now is now only slightly below its May 10 close. At this point stocks are very overbought. We are also now about to enter a statistical period (September-October) that has traditionally been the worst part of the market year. As such my opinion is that a more cautious approach is warranted for the next several weeks.

Caution does not necessarily mean to head for the hills. The market might fool us all and go straight up this year. It could be for example that investors' belief that the Fed is done raising interest rates will trump seasonal patterns in 2006. Or the possibilty of significantly lower oil prices might cushion any autumn decline this year. Both examples would show a stock market doing what it has to do to prove the most amount of people wrong.

However given the recent rally in stocks and the overbought current state of the market, prudence dictates a more cautious approach for the time being.

*Long SPY in various client accounts.